Cyprus clinches revised bailout deal

The European Union, International Monetary Fund, European Central Bank and Cyprus have agreed on a 10 billion-euro deal to bail out the indebted nation.

The proposal means effectively setting up a "good bank" and a "bad bank", with the "bad bank" - the Popular Bank of Cyprus, also known as Laiki, (the nation's second largest bank) - to be shut down.

Under the deal, accounts of 100,000 euros or less in the Popular Bank will be transferred to Bank of Cyprus (the nation's largest bank), while deposits above that amount, which are uninsured, will be frozen and used to help pay off the bank's debts.

Those large depositors would only get back whatever is left over after creditors are paid, with predictions that their investments will be largely wiped out.

Under the proposal, all smaller depositors with Cypriot banks (those with accounts less than 100,000 euros) would be fully protected and lose no money, unlike the earlier bailout plan where they would have been hit with a 6.75 per cent levy on the deposits.

However, larger depositors, originally up for a 9.9 per cent levy across all Cypriot banks, may now lose a much larger proportion of their funds if they are with the Popular Bank.

Even the larger depositors in the comparatively "good bank", Bank of Cyprus (BoC), will be affected by the bailout, with at least some of the value of their deposits being converted into equity to help recapitalise the BoC.

Shareholders and bondholders will also contribute to the recapitalisation.

Conditions attached

European leaders and Cypriot officials were forced back into negotiations after the original bailout proposal was blocked by the island nation's parliament following a backlash from depositors who faced a levy of between 6.75 and 9.9 per cent on their funds.

We believe that this will form a lasting, durable and fully-financed solution.

IMF managing director Christine Lagarde

Negotiations lasted most of the night, with European Commission vice-president Olli Rehn making light of the situation at a press conference outlining the new deal.

"It's been yet another hard day's night, I'm not saying a long and winding road," he joked, before adding more seriously, "But it was absolutely essential that an agreement be reached tonight."

The IMF's managing director Christine Lagarde says the latest deal is not intended as a stop-gap measure.

"We believe that this will form a lasting, durable and fully-financed solution," she said.

Cyprus will be forced to shrink its financial sector dramatically, so that the amount of assets held by its banks falls from eight times the size of the nation's economy to the EU average by 2018.

European authorities are also asking Cyprus to step up its anti-money laundering efforts and increase tax rates on capital income and corporations.

The Cyprus bailout will be the first under the new European Stability Mechanism (ESM), a permanent financial firewall for the eurozone with a lending capacity of up to 500 billion euros that came into effect last year.

The EU expects the ESM governors will be in a position to formally approve the agreement by the third week of April, subject to the completion of national procedures.